Berkshire’s Performance vs the S&P 500 2

For a non-insurance company – which describes Berkshire Hathaway, the parent – the federal tax rate is
effectively 10 1 ⁄2 cents per $1 of dividends received. Furthermore, a non-insurance company that owns more than
20% of an investee owes taxes of only 7 cents per $1 of dividends. That rate applies, for example, to the
substantial dividends we receive from our 27% ownership of Kraft Heinz, all of it held by the parent company.
(The rationale for the low corporate taxes on dividends is that the dividend-paying investee has already paid its
own corporate tax on the earnings being distributed.)
Berkshire’s insurance subsidiaries pay a tax rate on dividends that is somewhat higher than that applying
to non-insurance companies, though the rate is still well below the 35% hitting capital gains. Property/casualty
companies owe about 14% in taxes on most dividends they receive. Their tax rate falls, though, to about 11% if
they own more than 20% of a U.S.-based investee.
And that’s our tax lesson for today.
“The Bet” (or how your money finds its way to Wall Street)
In this section, you will encounter, early on, the story of an investment bet I made nine years ago and,
next, some strong opinions I have about investing. As a starter, though, I want to briefly describe Long Bets, a
unique establishment that played a role in the bet.
Long Bets was seeded by Amazon’s Jeff Bezos and operates as a non-profit organization that
administers just what you’d guess: long-term bets. To participate, “proposers” post a proposition at Longbets.org
that will be proved right or wrong at a distant date. They then wait for a contrary-minded party to take the other
side of the bet. When a “doubter” steps forward, each side names a charity that will be the beneficiary if its side
wins; parks its wager with Long Bets; and posts a short essay defending its position on the Long Bets website.
When the bet is concluded, Long Bets pays off the winning charity.
Here are examples of what you will find on Long Bets’ very interesting site:
In 2002, entrepreneur Mitch Kapor asserted that “By 2029 no computer – or ‘machine intelligence’ – will
have passed the Turing Test,” which deals with whether a computer can successfully impersonate a human being.
Inventor Ray Kurzweil took the opposing view. Each backed up his opinion with $10,000. I don’t know who will
win this bet, but I will confidently wager that no computer will ever replicate Charlie.
That same year, Craig Mundie of Microsoft asserted that pilotless planes would routinely fly passengers
by 2030, while Eric Schmidt of Google argued otherwise. The stakes were $1,000 each. To ease any heartburn
Eric might be experiencing from his outsized exposure, I recently offered to take a piece of his action. He
promptly laid off $500 with me. (I like his assumption that I’ll be around in 2030 to contribute my payment,
should we lose.)
Now, to my bet and its history. In Berkshire’s 2005 annual report, I argued that active investment
management by professionals – in aggregate – would over a period of years underperform the returns achieved by
rank amateurs who simply sat still. I explained that the massive fees levied by a variety of “helpers” would leave
their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost index
fund. (See pages 114 - 115 for a reprint of the argument as I originally stated it in the 2005 report.)
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